How To Play The Breakout In Uranium (URA, NUCL, PKN, CCJ, PDN, UUU)
It’s a bull market in uranium—again! Uranium’s price was “in the tank” for the longest time, thanks to the massive supply provided by retired Cold War nuclear weapons. That supply started to exhaust early in the last decade, which prompted a uranium moonshot (see chart below).
Like most commodity superfast rallies, this one ended in tears. But uranium has since risen from its radioactive ashes—after forming a “higher low—and recently broke out to a two-year high:
Breakouts always catch our eye here at HAI because commodity markets have a tendency to rise much higher and farther than anyone think—which can be very profitable for investors like us.
Should this uranium breakout be bought? And if so, how can you best integrate it in your portfolio?
Higher Demand, Less Cheap Supply
Like crude oil, there’s plenty of uranium available to satisfy global demand—if you’re willing to pay up, that is. Because like crude, much of the “cheap” uranium, has already been extracted from the earth.
In his recent column for Growth Stock Wire, energy expert Matt Badiali analyzed the costs associated with extracting uranium:
|Mining Cost||Pounds available in 2007||Pounds available in 2008||Percent Change|
|$15/lb||6.5 billion||1.8 billion||-73%|
|$30/lb||9.8 billion||8.2 billion||-16%|
|$50/lb||12.0 billion||11.9 billion||-1%|
Source: Growth Stock Wire
(Sound familiar? Similar arguments have been made by “Peak Oil” theorists.)
When uranium crashed in 2008-09, it was no coincidence that there was a solid price floor at $40/lb. Nowadays, you simply can’t mine it any cheaper than that.
But demand is also on the rise. Mining analyst David Talbot of Toronto-based Dundee Securities, sees demand for uranium soaring not too far into the future, citing rising Chinese nuclear activity in particular:
China currently has 13 reactors in operation, which is about 2% of their electrical production capacity. But it has 27 reactors that are under construction, 50 in the planning stages, and it has plans to grow that number to about 188 reactors by 2020, which would represent about 7% of its electrical production capacity. This could essentially increase the country’s uranium use from its current annual 8 million pounds (Mlb.) to about 45-50 Mlb., which is roughly equal to what the U.S. uses today.(Source: Casey Research)
Other emerging markets like India and Russia are also ramping up their nuclear power efforts; even Japan and Korea have made strides to build up new nuclear capacity. And that’s going to take a lot more uranium to fuel.
So dwindling uranium supply (at least the cheap supply) coupled with rising demand, confirmed by a two-year price breakout? Looks like uranium is a BUY to me!
How To Get Your Radioactive Exposure To Rising Uranium Prices
The traditional way to play uranium is to buy Cameco (NYSE:CCJ), the largest and most well-known uranium miner:
As goes uranium, so goes large-cap miner Cameco. (Source: Right Way Charts)
For some diversification, other large-cap miners to consider are Paladin Energy Ltd. (TSX:PDN) and Uranium One (TSX:UUU).
However, buying individual miners can still introduce unnecessary risk into an otherwise solid trade. There’s nothing worse than watching bad management screw up a bull market.
Therefore you can further diversify your miner-specific risk by picking up the new Global X Uranium ETF (NYSE:URA). Here’s a full list of URA’s holdings (which, not surprisingly, features our three aforementioned large-caps as its three largest holdings).
URA just began trading in early November, so we have a limited sample of historical results. But so far, the ETF has trended up, in tandem with uranium’s spot price, as expected. With its not-unreasonable 0.69 percent management expense, I see no reason offhand why it shouldn’t serve as a reasonable proxy for the price action of uranium stocks at large.
Junior uranium miners would certainly provide some leverage—both ways—on the price action in uranium. But if you’re going to buy juniors outright in this sector, make sure you know more about the company than the person on the other side of the trade. Most investors are probably best advised to stick with the large-cap miners and/or URA for the most straightforward play on rising uranium prices.
Nuclear energy ETFs such as the iShares S&P Global Nuclear Energy Index Fund (NASDAQ:NUCL) and the PowerShares Global Nuclear Energy (NYSE:PKN) will each provide you with some exposure to the large-cap uranium miners as well.
But neither is a “pure play” on uranium miners, as each has sizable positions in other sectors, such as industrials, utilities and in the case of PKN, even information technology.
There are a few too many mystery ingredients in these nuclear energy ETFs for my liking—I prefer to stick with the purer plays we listed above.
TANSTAAFL: What Could Trip Up This Trade?
Everything sounds pretty bullish for uranium—but we know there’s no free investing lunch (otherwise, we’d all be stinking rich already). So what are the potential risk factors that could trip up this promising trade?
When uranium prices crashed in 2008-09, crude oil dropped down from $150/barrel to $35, and the world was mired in a global credit crisis. If we see a repeat of either or both scenarios, uranium prices are likely to suffer—lower oil prices discourage investment in other energy sources, and less access to credit hampers miners’ ability to carry out production.
(Though with the economic recovery and crude breaking out to two-year highs, these risks appear unlikely in the short term.)
Also, productivity gains delivered by technology advances can always depress individual commodity prices; new reports out of China suggest that new technology could ease uranium supply concerns by significantly boosting nuclear plants’ usage rate of the fuel.
We’ll have to keep an eye on these risk factors moving forward (and more importantly, let the market stay diligent for us by using trailing stops!).
‘Cause I’m Radioactive, Oh Yeah
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